In 2000, the UK Aerospace industry generated
a domestic turnover of £18.25 billion, of which 60 per cent
was exported. 56 per cent of turnover is in the commercial sector
and, given the slow growth of defence sales, the civil market
was viewed as the most important over the next decade. Over the
last 10 years, UK Aerospace made on average a £2.5 billion
annual contribution to the UK balance of tradelast year
this was £3.8 billion. The industry employs directly over
150,000 people, with a further 300,000 employed indirectly; of
these, some 11 per cent are involved in R&D. In total, the
industry spends 10 per cent of its turnover on R&D, of which
40 per cent is funded by companies.

The benefits of this success are spread widely
throughout the UK. SBAC estimates suggest that there are over
2,000 companies comprising the UK Aerospace industry. There are
obvious local concentrations of aerospace activity in the North
West, South West, South East and Midlands, but there are few regions
of the UK that do not have some aerospace presence.

THE AEROSPACE
SUPPLY CHAIN

The UK Aerospace industry comprises a number
of core companies (systems integrators and Original Equipment
Manufacturers) who undertake the bulk of design and development
work either independently or part of international consortia.
These firms act as "routes to market" to extensive supply
chains of smaller firms, including a large number of small and
medium sized enterprises (SMEs). Not all of these are defined
as aerospace companies, but many are dependent on aerospace business
for a significant part of their turnover. An SBAC survey of the
supply chains of four leading UK aerospace companies (BAE SYSTEMS
military aircraft, Airbus UK, Agusta-Westland, Rolls-Royce) revealed
that 82.5 per cent (2,125) of the total number of companies were
UK based, responsible for 71.1 per cent of value of contracts
allocated in the sample years (1999-2000). While this level does
include some large original equipment manufacturers (OEMs), by
far the majority of surveyed companies recorded an aerospace turnover
of less than £40 million and over half, less than £10
million per annum.

Total employment of firms selling directly to
the four platform companies at tier one level was estimated at
over 93,000. Scaling up to the industry at large suggests some
397,700 jobs are linked to business undertaken with all aerospace
primary purchasers and domestic public authorities. This suggests
that over 1,600 companies depend upon aerospace for more than
25 per cent of turnover, although only 2 per cent of suppliers
were dependent on the four platform companies for more than 50
per cent of sales. Each of the four companies has a discrete supply
chain, with varying regional distributional characteristics. However,
there is a significant overlap between BAe military tier one suppliers
and Airbus (16.2 per cent) and Westland and Airbus (16.9 per cent).
The overlap between the Rolls-Royce chain and the three others'
is much less marked, indicative of the more specialised nature
of the propulsion supply chain.

The overall degree of dependence on civil business
cannot be derived from the data, but in general UK Aerospace turnover
recorded a 55/45 civil military split in 2000. Clearly, at all
levels of the supply chain, from platform downward, exposure to
civil risk varies markedly from company to company. Similarly,
the degree of substitutability between defence and civil activity
and between aerospace and other business sectors will also varyintuitively
this will be higher in aerostructures and propulsion and for companies
further down the supplier chain delivering less technologically
specific goods and services. Inter sectoral substitutability will
also depend upon general economic factors and the buoyancy of
other markets.

IMPACTOF
11 SEPTEMBERON
UK AEROSPACE

Before 11 September, the civil aerospace industry
was expecting a period of reduced demand in line with deteriorating
world economic conditions. Adjustments to production levels were
likely. It was also evident that forces likely to effect a major
restructuring of the world airline industry (especially in Europe)
were already apparent. Set against these pessimistic conditions
was the view that the underlying demand for commercial aircraft
would be boosted by the retirement of older types, especially
those unable to meet increasingly stringent environmental requirements.

The full impact of 11 September on the demand
for commercial aerospace products cannot yet be quantified with
accuracy. In the short term (from first quarter 2002 until at
least third quarter 2003) these are likely to be grave. The sharp
fall in passenger traffic has already had an impact on airline
revenues and has catalysed a number of airline bankruptcies. So
far, the response from aerospace manufacturers has been mixed.
Boeing and Bombardier have announced what were probably cyclically
driven reductions. Airbus has frozen production schedules, but
is expected to reduce planned levels for 2002 and 2003. Revenue
from spares and maintenance activity has already begun to decline
as aircraft are either retired or placed in storage and has an
immediate effect on the aero-engine and repair and maintenance
sectors.

Following the Gulf War of 1991, there was also
a sharp fall in immediate demand, particularly in the trans-Atlantic
market. Traffic took a year to recover, with general economic
impacts even longer to dissipate. Until we have seen the exact
scope of the US-allied response, we cannot realistically "begin
the clock" on the recovery phase. This crisis also centres
unequivocally on the use of commercial aviation as a weapon of
terror in the world's core commercial aviation market. While we
can be confident that technological and operational solutions
can be found to the security questions raised by the hi-jack and
the suicidal actions, there could be a long term residual impact
on confidence. More important, world perceptions and the future
cost and general experience of air travel may have changed permanently.

Unlike the Gulf War crisis, the responses and
subsequent effects could be open-ended and not contained to the
immediate arena. However, the key drivers for the demand for air
transport are still the usual combination of world (and especially
US) economic growth, security, safety and affordability. An additional
factor may now be the speed with which the airline industry rationalises
to create more robust and resilient carriers.

Along with the rest of the air transport community,
the SBAC argues strongly that confidence will return once the
public can be assured that advances in technology and improved
procedures are in hand to counter the threat of terrorism. In
many parts of the world, there is no viable alternative to air
transport and generally other modes of communication offer only
partial solutions to business and social needs. IATA is confident
that long term growth rates should at least match those of its
provisional 2001-2005 forecasts. The UK Aerospace industry, as
a major player in the world civil aerospace market, will continue
to benefit from this growth. It is imperative, however, that all
of the stakeholders in UK Aerospace (public and private), remain
committed to long term solutions to the industry's technological
and commercial challenges.

IMPACTON
UK AEROSPACE INDUSTRY

While it is too early to quantify the impact,
UK Aerospace will not escape either the short or long term consequences
of these events. The industry was expecting a reduction in the
demand for commercial aerospace products due to cyclical factors,
this will now be deeper and more prolonged than predicted. As
noted above, around 55 per cent of UK Aerospace turnover is in
the civil sector, but some individual companies are more or less
dependent on commercial business. Although the immediate effects
will be felt by companies at the top of the industry, problems
will cascade throughout an extended supply chain, affecting smaller
firms throughout the UK, but especially in the North West, South
West, South East and the East and West Midlands. To date, several
UK companies have announced redundancies totalling over 7,000
(with an estimated 11,000 jobs lost in the supply chain). Again,
some of these may have been part of planned responses to the cyclical
down turn, but the rapid deterioration of the civil aerospace
market has contributed greatly to the severity of the losses.

Defence-related activities are likely to be
less affected, indeed, several companies are likely to benefit
from increases in the defence and aviation security businesses.
However, the civil sector was seen as the most important source
of long term market growth for the industry as a whole. Although
the engine of commercial growth will return, we cannot assume
that the future will reflect the past in terms of demand. Similarly,
companies further down the supply chain are less likely to make
a sharp distinction between civil and military business and the
impact of a sharp down turn in the civil sector will depress demand
generally throughout the aerospace supply chain with a commensurate
effect on capacity and employment.

SUPPLY CHAIN
IMPACT

The impact will flow down the supply chain immediately,
with a real risk that the sudden changes in demand will be amplified
by two factors:

 the drive by all companies to reduce
inventory when faced by a sudden drop in demand;

 the unfortunate tendency for procurement
systems to amplify pessimistic signals as they are passed from
one tier of suppliers to another.

The risk of turmoil in the supply chain and
its consequent costs and the adverse impact on cash-flow are extremely
high for lower tier suppliers. In some cases, some US OEMs have
already unilaterally extended payment terms to their suppliers
(by 15 days in one case) and have put their current delivery schedules
on hold. Any shipment now needs explicit approval and those made
against current schedules may be returned.

Falling demand will inevitably affect the supply
chain, with a commensurate impact on employment. Again, it is
impossible to predict with confidence these effects, based on
the SBAC supply chain study, well over 900 UK tier one companies
are especially sensitive to down turn, with a minimum of 9,000
jobs in the supply chain directly vulnerable to a 10 per cent
fall in business from four major UK aerospace customers. If this
estimate is applied to all of UK Aerospace business, this could
be as high as 40,000 jobs in the supply chain. These figures exclude
employment effects of further capacity reductions amongst UK civil
aerospace primes.

CONCLUSION

The current crisis in the civil aerospace market
is having an immediate and severe impact on UK Aerospace. However,
the SBAC confidently expects the market to recover, albeit slowly
over the next three years. UK companies are fundamentally sound
with a deep and extensive set of world class technologies. In
the short term, the UK civil aerospace depends upon regained confidence
in air travel and airline liquidity and stability. In this respect,
HMG should ensure that agencies such as the Export Credit Guarantee
Department (ECGD) are fully able to support sales of aircraft
and engines.

In the longer term, investment in technology
remains the key to recovery and future growthespecially
in meeting new demands for aircraft and airport security and increasingly
stringent environmental regulation (which remains the most important
long term issue for civil aviation). UK firms will continue to
invest in new technology, but if UK aerospace is to come through
this crisis in a healthy state and to be able to face its longer
term consequences, HMG must respond to the UK need for an expanded
programme of R&D activity in both the civil and military sectors.
Moreover, the civil and military aspects of this programme should
be well co-ordinated and directed with the full participation
of industry and academia.

Q. How is Boeing responding to the new US
government requirements for airplane security (ie cockpit doors),
and what are the implications of those requirements?

R. Immediately following the September 11
tragedy, Boeing began working with the U.S. Government, airline
customers, pilots and others in the aviation industryincluding
Airbusto identify the best solutions for improving aviation
security, with a particular emphasis on flight deck security.

Boeing hosted several meetings that brought
together industry and government officials to discuss security
issues and played a leadership role in the airplane security "rapid
response team" established by the US Secretary of Transportation.

Following the release of recommendations by
that team to the Secretary, Boeing established a new organisation
headed by Charles R Higgins to help the airlines implement the
recommendations and to identify and develop new security products
and services for the aviation industry.

By the end of November Boeing expects to have
design proposals ready for cockpit doors and adjacent structure
that will improve the security of flight decks and meet all other
safety criteria for rapid decompression and emergency access and
egress. Boeing also is working on designs for passenger cabin
cameras to give pilots a view of what's happening in the cabin
during an emergency.

A third near-term programme is addressing the
US government's desire to ensure that transponders, which enable
ground controllers to identify and track airplanes, cannot be
turned off during flight. Longer-term, Boeing is vigorously pursuing
air traffic management and broadband communication technologies
that can enhance the security of the worldwide air transportation
system. Implementation of the near-term changes is expected to
have financial implications for the airlines. However, the aviation
industry recognises that improved airplane and airport security
is essential to restoring traveller confidence and thus the financial
health of the industry. Unlike some of the changes taking place
at airports, none of the aforementioned airplane changes will
adversely impact the processing of passengers and their baggage.

Q. What impact is the September 11 tragedy
having on aircraft orders and aerospace jobs?

R. The terrorist attack on the United States
is having a major impact on air travel and, by extension, the
aerospace industry.

US airlines are operating at roughly 80 per
cent of their normal capacity, which means they have parked airplanes
and will not need many of the airplanes they had on order for
delivery over the next two years. Boeing has readjusted its projected
deliveries to approximately 522 airplanes this year (down from
538) and 350-400 airplanes next year (down from 510). A further
decline in deliveries is expected for 2003, although Boeing is
not yet prepared to release numbers that far into the future.
These declines necessitate sharp reductions in employment. Boeing
has announced that its commercial airplane workforce will decline
by 20,000 to 30,000 positions over the next two years. The downturn
also will force Boeing to place fewer orders with its suppliers.
However, Boeing has no intention of pulling back into the company
work currently done by its suppliers. Boeing is concerned about
the health of its partner companies as we work together through
this downturn.

This is a short response to the Committee's
inquiry into the immediate implications of the current situation
on the air transport industry from the British Cargo Airline Alliance.

The BCAA was formed in 1998 to advance the interests
of the UK's all-cargo airline industry to Government. This was
principally to present a coherent voice to officials and Ministers
during their bilateral air service negotiations with the USthe
largest air-freight market in the world. Through its secretariat,
the BCAA also works with Ministers and officials on other key
issues that affect our industry.

IMPACTOF
11 SEPTEMBER

Like the rest of the aviation sector, the UK's
cargo airline industry has been adversely affected by the events
of September 11. Although not yet facing job losses, we have seen
levels of cargo on board aircraft operated by our members declining
significantly. The level of cargo aircraft charters has also fallen,
particularly as much of this business relies on computer companies
and other hi-tech industries who are facing their own economic
difficulties.

So far our members have weathered the storm,
in large part because much of their business involves the provision
of whole aircraft to other airlines. However, as air cargo volumes
shrink, it is inevitable that some airlines will decide, in due
course, to cut back on the number of outsourced freighter operations
they offer to their customers. When that happens, our members
will inevitably suffer and there may well be direct job losses.
Obviously, matters are not helped at the moment by the massive
increases in insurance premiums and security measures, which have
imposed significant cost additions at the very time when revenues
are weaker.

ROLEOF
GOVERNMENT

The Committee is familiar with the BCAA's position
on any potential UKUS "open skies" deal, a subject
that has again been discussed in light of the events of 11 September.

In these difficult times, the BCAA believes
it is the role of Government to provide wholehearted backing to
its domestic carriers. The last thing we would wish to see at
this time is any "open skies" agreement with the US
which is likely to disadvantage our members' interests or further
undermine their competitive position.

The Committee will note that the US Government
has already committed a sum of $500 million in state aid to cargo-only
airlines. US cargo airlines have also benefited from short term
US Government contracts for additional airlift in support of events
in the Middle East. These contracts were not placed out on a competitive
tender basis, and foreign airlines were not invited to submit
details of their available capacity.

UK/US REGULATORYAND COMPETITION
REGIMES

The BCAA looks to its Government to ensure that
any new Air Services Agreement with the US establishes equal access
to equal markets for carriers from both countries;

This means:

(a) that the US Government-financed commercial
distortions (ie Fly America and CRAF) should be removed from the
equation by giving carriers from both countries equal access to
public sector contracts;

(b) that wetleasing opportunities, which
are already heavily exploited by US carriers in the UK and Europe,
should be extended to UK carriers in the US;

(c) as far as is possible and with due regard
to security considerations, the nationality of shareholders in
an airline should be immaterial given that the regulatory regime
applied to an airline is effectively determined by its principal
place of business;

(d) only granting fifth freedom rights to
US carriers from the UK into the rest of the EEA (our domestic
market) if British airlines are granted reciprocal access to operate
within the US domestic market. This needs to extend beyond codesharing
or alliances, as ad hoc charter airlines and freight carriers
are unable to utilise such devices. It must mean real domestic
access in exchange for real domestic access. Should a deal be
struck which grants such access to US airlines in Europe without
giving our carriers equivalent access to the US market, our members
would inevitable lose contracts as US carriers moved their own
aircraft into Europe to fly routes currently contracted out to
British and European airlines. They would do this on the back
of a protected position in their own home markets, effectively
establishing themselves as quasi-European operators without having
to comply with any of Europe's more onerous labour, maintenance
and working time practices.

It is our firm belief that any deal secured
now for political reasons or to benefit one particular passenger
airline which does not address these fundamental issues of principle
would be a mistake.

Such a deal would be contrary to the long term
interests of the UK's aviation sector (which goes beyond airlines
into maintenance companies, engineering organisations, research
and development and significant job provision) and would throw
away the opportunity of securing a truly liberalised regime. It
would also be contrary to the interests of the customers of airlines,
passengers and shippers alike, who would see long term choice
reduce as airlines fail, unable to compete in a Government-created
distorted market.

Finally, we believe that it would be inappropriate,
and quite possibly unlawful, for the UK to rush into a new Air
Services Agreement with the US at this time and that it should
await the ruling of the European Court of Justice case brought
by the European Commission in respect of the legality of existing
"Open Skies" deals.

THE IMMEDIATE IMPLICATIONS OF THE CURRENT
SITUATION ON THE AIR TRANSPORT INDUSTRY

"The Sub-Committee wishes to consider the
implications of the terrorist attacks on 11 September 2001, and
the responses to those events by the industry, regulators and
governments. In particular the Sub-Committee will consider the
economic and political implications of the downturn in passenger
numbers, security, the role of international subsidies and the
proposals for Government assistance for the industry, and the
effect of the rules of ownership on the United Kingdom air transport
industry".

1. Friends of the Earth England, Wales and
Northern Ireland (FOE) has worked on aviation issues for the past
decade, including as part of the Europe-wide "right price
for air travel" campaign. We work on the economic and environmental
consequences of aviation, and with local communities on its impacts.
FOE fully understands the wish of the Sub-Committee to consider
the consequences of the tragic incidents in the United States
on 11 September 2001, and hopes that this contribution will inform
those considerations.

2. FOE believes that the impact of the September
events has not been uniform, or in parts even negative, on the
UK aviation industry. The events have affected routes and sectors
differently. Thus transatlantic routes and those "flag carrier"
airlines providing them have suffered substantial losses, whereas
European routes have suffered less. Meanwhile the low-cost carriers
that provide some of the latter routes have in fact continued
to grow.

3. The Sub-Committee is considering the
implications of "the downturn in passenger numbers"
but, for eg the UK/Irish low-cost carriers, there has not been
a downturn at all. [1](The
same buoyant position applies to the American low-cost carrier,
South West Airlines). Any actual downturns may be limited, or
short-term, and need to be set against the very high growth rates
achieved over recent decades, and forecast equally to continue
to be achieved in the future[2].
There are also other, balancing, effects of the downturn, such
as the continuing drop in oil prices, reducing the cost of aviation
kerosene (which is also untaxedsee paragraph 13 below).
In a longer term perspective, the immediate downturn such as it
is may just be a "blip" in the continuous and rapid
growth in air traffic.

4. The events have merely accelerated the
restructuring of the airline industry that was developing before
September 2001; that is:

 collaboration between large and small
airlines within the three developing global alliances; and

 a general restructuring in favour
of the low-cost carriers and against some of the "flag carrier"
airlines.

This longer term restructuring is based on the
application of increased competition following deregulation, and
the removal of costs in the airlines and at airports. Smaller
airlines, with a weaker balance sheet, or those that had already
made commercial mistakes, are likely to be the early "victims"
of this process (Sabena, Aerlingus, Swissair); airlines with a
stronger asset base or greater ability to restructure are more
likely to survive (BA, which was in case restructuring before
September). The low-cost carriers are the clear beneficiaries
in terms of long-term competitiveness, market share (whether overall,
or on individual routes) and market valuation.

5. This view is supported by both the traditional
and low-cost UK airlines[3].
The low-cost carriers have very quickly identified the scale of
the problem confronting their "traditional" competitors,
and the scale of the commercial opportunity open to themselves,
and to some others, including BA[4].
The restructuring also extends to progress on the "Open Skies"
negotiations between the US and UK governments[5].

6. The restructuring will probably be particularly
favourable to the UK airline industry (compared say to European
rivals): two of the top three European low-cost carriers (easyJet
and Go) are based in the UK, and the third is based in Ireland
but operates also out of the UK (Ryanair). Meanwhile, BA is better
placed to successfully restructure, and also take advantage of
the opportunities for mergers and acquisitions amongst the other
European airlines (eg negotiations with KLM). This view is supported
by commentators[6].

7. The restructuring will have at least
one very important consequence: a further reduction in the price
of air travel, particularly in Europe and possibly more widely.
This has been pronounced since September eg "Go offers flights
for just £10" announcement 12 November (London-Newcastle
£10 single,Venice £17.50,Prague £25).
Again this is a continuation of longer term trends, but airline
restructuring will accelerate it further. (It should be noted,
also, that the UK government does not apparently have indices
of air fares that would allow it to monitor this price movement,
and its potential consequences.) There will also be downward pressures
on airport charges. The environmental consequences of restructuring
and further air fare reductions are considered in the next section.

THE ENVIRONMENTAL
CONSEQUENCESOF
AIRLINE RESTRUCTURING

8. The environmental impacts of aviation
are already well established; for example by the Royal Commission
on Environmental Pollution in the UK (Energy: the changing climate
2000, paragraph 6.129), and the Intergovernmental Panel on Climate
Change (Aviation and the Global Atmosphere 1999).

9. It is noted that the Sub-Committee intends
to consider the "economic and political implications"
of the downturn, but that the environmental implications have
not been specifically identified; and also that they will consider
"the role of international subsidies and the proposals for
Government assistance for the industry". As an environmental
transport and sustainable development organisation, FOE's concern
is about the longer term sustainability and environmental impacts
that the events might cause, and then about the social, economic
and political problems that would follow these.

10. The responsiveness of the marketthat
is to say, airlines and consumersto lower prices and air
fares, and the ability of the low-cost carriers to immediately
capitalise upon the September events, has been graphically illustrated.
In the long run this will represent itself as a further acceleration
of aviation growth trends, which we regard as already unsustainable.
This particularly concerns the issue of global climate change,
which of course will affect the UK as well, but applies also to
all the other adverse environmental and social impacts of aviation
growthincluding airport capacity increases, pollution (air
and noise) and surface access problemsas they affect the
UK regions and local communities.

11. This situation needs also to be understood
in the context of (i) the failure to include emissions from international
aviation within the Kyoto protocol, and (ii) the absence of any
decision to limit or reduce climate change emissions from aircraft
at the 33rd Assembly of the International Civil Aviation Organisation
in late September 2001 (instead, to engage in a further three
year period of investigation into potential measures and targets,
reporting in 2004), and not take any action on proposals submitted
by the EU requesting more urgent consideration of this issue.
The UK government has not identified any significant response
outside these international and EU actions (UK Climate Change
Strategy, 2000 Part 2, paragraphs 79-82, 89).

12. The market response to the September
events, and its climate change impacts, will therefore not be
restrained by any measures of demand management. Indeed, it is
quite possible that the market response will, over time, actually
worsen the impact of aviation on the environment, local to global,
with little or no immediate prospect of that negative impact being
mitigated.

13. In relation to subsidies our general
position is that aviation already receives substantial subsidies,
in a number of forms, which are usually more hidden from view.
These include tax free fuel, no VAT on aircraft purchase, purchase
of goods free of duty outside the EU zone, subsidy of airport
related infrastructure, etc.; the arguments are set out at greater
length in the paper Tax Free Aviation by Brendon Sewill, former
Treasury Advisor on Economic Policy (AEF/FOE).

14. In relation to the differential between
the substantial subsidies offered to American airlines by the
US government, and the approach taken by the EU Commission; whilst
the response of the Commission may appear to have been both restrained
(compensation only for the four days' closure of North American
airspace; help in meeting security and insurance costs) and even
rigorous (ban on further state aid for Sabena), other assistance
has been permitted (freezing rights for take-off and landing slots
at European airports until spring 2003; and a payout to Alitalia
of an existing state aid package, even though it had earlier ruled
that previous conditions had not been met).

CONCLUSIONS

15. Our conclusions are fourfold:

 that any aviation "downturn"
in the UK is affecting different sectors differently, and some
favourably; and may just be short term, to be followed by a continuation,
even an acceleration, of high growth;

 that the UK low-cost airlines, and
in a different way BA, are best placed to capitalise on this opportunity
compared to other European competitors;

 that the environmental implications
of this airline response, as a result of still lower air fares
against a historic downward trend, should be considered by the
Sub-Committee (alongside the "economic and the political"),
and will be substantial and negative;

 that no assistance or additional
subsidy at all is justified but that, when the short-term nature
of the downturn is revealed, a process of demand management including
by price should be appliedglobally, in the EU and the UKin
order to respond to these environmental problems, at present ignored
by both industry and government.

16. Consequently, we ask that the Sub-Committee,
in reviewing the shorter term impacts of the September events,
particularly in relation to individual airlines, should also give
consideration to the potential longer term environmental impacts
and the continued absence of governmental or inter-governmental
mechanisms to respond to the continuing market driven growth of
the aviation industry.

17. We would also welcome the "wider-ranging
inquiry into the state of the industry" which the notice
indicated may be considered in the future.